Click to Enlarge Though we’ve seen some impressive bullish action in the first quarter, many retailers like JC Penney (NYSE:JCP) seem to be going the way of former giant Woolworths. Peer stocks like Kohls (NYSE:KSS) and Dillards (NYSE:DDS) haven’t been in headlines quite as much, but they hasn’t followed along with the bullish trend either.
As I see it, Dillards presents the best technicals for a short-side trade. It topped last November, and been trading sideways since it gapped down on Q4 report results in February.
As you can see, DDS is showing a head and shoulders top pattern.
This is an extremely popular pattern because it’s one of the most reliable of all formations. It’s also easy to spot.
The classic head and shoulders top looks like a human head with shoulders on either side of the head. A perfect example of the pattern has three sharp high points, created by three successive rallies in the price of the financial instrument.
The first point – the left shoulder – occurs as the price of the stock in a rising market hits a high and then falls back. The second point – the head – happens when prices rise to an even higher high and then fall back again. The third point – the right shoulder – occurs when prices rise again but don’t hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.
A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The first low point occurs at the end of the left shoulder and the beginning of the uptrend to the head. The second marks the end of the head and the beginning of the upturn to the right shoulder. The neckline can be horizontal or it can slope up or down. The pattern is complete when the support provided by the neckline is “broken.” This occurs when the price of the financial instrument, falling from the high point of the right shoulder, moves below the neckline.
Another thing we’re looking for in this head and shoulders top is volume on the break of this neckline. So if we were to measure the head and shoulders top area (very similar to the copper chart I covered in a video) by drawing a line from the neckline to the top of the “head” of the head and shoulders top, and then dropping that line down from where the neckline is now, that would put the price target for a short around $60/share.
InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123. For more information on which service is for you click here.